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Pennsylvania: Good Faith and Fair Dealing

Posted By USFN, Monday, October 13, 2014
Updated: Tuesday, October 13, 2015

October 13, 2014

 

by Louis P. Vitti
Vitti & Vitti & Associates, P.C. – USFN Member (Pennsylvania)

Earlier in 2014, this author submitted a case update regarding Hirsch v. Citimortgage, 2:13-cv-1344. That case dealt with breach of contract and Unfair Trade Practices and Consumer Protection Law (TPCPL) claims, which were dismissed by the court. The court had ruled in favor of Citimortgage; however, it was noted that breach of an implied covenant was not pled properly by the plaintiff. Accordingly, the prior case note cautioned lenders when dealing with borrowers, to be certain to evaluate the actions to be taken in light of reliance and/or good faith and fair dealing. That warning has come to fruition.

In the case of Rearick v. Eldterton State Bank, 2014 PA Super. 157, 2014 WL 3798512 (Pa. Super. July 23, 2014), the superior court reviewed a trial court’s decision. The lower court held that the bank’s preliminary objections, based on res judicata grounds, were valid and that the borrower could not proceed because all causes of action were determined in the foreclosure.

The superior court concluded that Rearick’s claims “are best addressed as permissive counterclaims.” Consequently, it reversed the trial court’s order sustaining the bank’s preliminary objection on the basis of res judicata, with the appellate court stating, “Neither in word nor in substance do Rearick’s claims in the instant action call into question the legal effect of the earlier foreclosure action. They do not contest the foreclosures as such, nor do they directly contest the debt itself … Rather, Rearick seeks damages from [the bank] for alleged misconduct and breaches of implied terms of the parties’ contract(s) and/or other non-contractual obligations, primarily for actions that occurred after the creditor-debtor relationship already had been established.”

The superior court’s ruling, however, did contain one limited caveat: The plaintiff “may not seek damages for [the bank’s] allegedly commercially unreasonable method of liquidating the properties surrendered by the plaintiff in foreclosure. ... that claim was litigated and disposed of in the prior action. … Moreover, were [the plaintiff] to secure damages specifically on that matter, it would undermine the foreclosure judgment: implicit in that judgment was the trial court’s blessing of all matters pertaining to the foreclosure, including [the bank’s] disposition of the properties at issue.”

Ultimately, the superior court affirmed the trial court’s order in part, reversed the order in part, and remanded the case back to the lower court — with the opportunity for the borrower to amend his complaint to include the causes of action deemed permissible by the appellate court.

© Copyright 2014 USFN. All rights reserved.
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Maine: Greenleaf Revolutionizes Foreclosure Practice

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Santo Longo
Bendett & McHugh, PC – USFN Member (Connecticut, Maine, Vermont)

On July 3, 2014, the Maine Supreme Judicial Court issued its opinion in Bank of America v. Greenleaf, 2014 ME 89. In its decision, the court clarified the standing requirements in Maine. In addition to being the one entitled to enforce the note, the plaintiff also must be the “owner” of the mortgage. This ownership requirement is not described in, or required by, the state statutes. However, in reading the line of Supreme Judicial Court decisions leading up to Greenleaf, it can be discerned that one becomes an “owner” of a mortgage either by being the original mortgagee or by receiving a valid assignment of mortgage from the original mortgagee.

The trial court in Greenleaf had entered a foreclosure judgment on behalf of Bank of America. The borrowers appealed, claiming, among other things, that Bank of America did not have standing to foreclose because the only assignment introduced into evidence was from Mortgage Electronic Registration Systems, Inc. (MERS), as nominee for Residential Mortgage Services, Inc. (RMS), to BAC Home Loans Servicing, LP f/k/a Countrywide Home Loans Servicing, LP — which thereafter merged into Bank of America. There was no assignment of mortgage from RMS. The mortgage also contained the following language in bold and all capitals “FOR PURPOSES OF RECORDING THIS MORTGAGE, MERS IS THE MORTGAGEE OF RECORD.”

The court, seemingly attracted to the bolded language, seized on that language to find that MERS only had the right to record and was never a mortgagee under Maine law. The court referenced, but summarily disregarded, other persuasive provisions of the mortgage that would have bolstered claims that MERS did have the rights of a traditional mortgagee1. The court found that “the mortgage conveyed to MERS only the right to record the mortgage as nominee for the lender, RMS” and “when MERS then assigned its interest in the mortgage to BAC, it granted to BAC only what MERS possessed — the right to record the mortgage.” The court also noted that there was “no evidence in the record purporting to demonstrate that MERS acquired any authority with respect to Greenleaf’s mortgage by any means other than that defined in the mortgage itself.” As a result, the court concluded that since BAC only acquired the right to record the mortgage, it never became the “owner” of the mortgage, and Bank of America, as successor to BAC, did not have standing to foreclose.

Since Greenleaf, foreclosures in Maine on MERS mortgages have largely halted. MERS has issued a directive to its members not to obtain assignments from the original lender. Fidelity National Financial group of title companies has issued underwriting guidelines that require an assignment from the lender before a title policy will be issued without an exception. First American’s underwriting guidelines also require an assignment of mortgage from MERS and an assignment of mortgage from the original lender or other evidence (satisfactory to First American) that MERS had the authority to assign the mortgage and not just the right to record the mortgage. Obtaining the assignments from the original lenders will be impossible in many instances because many of the lenders are out of business. However, there are some that are still in business, and some servicers have powers of attorney from their correspondent lenders and could therefore execute assignments on the lenders’ behalf.

Other than obtaining assignments from the lenders, there have been discussions regarding introducing into evidence the MERS® System Rules of Membership and the current servicer’s MERS® Membership Application. These two documents, together with the MERS® Procedures, constitute the MERS® Membership Agreement as defined in the glossary of the current MERS® System Rules of Membership. The problem with this proposal is that the current servicer’s membership application is not relevant to the original lender’s application, and the current servicer cannot use its application to prove to the court what the original lender’s application stated. Also, the servicer may not know what version of the MERS® System Rules of Membership was in effect at the time the mortgage originated, and the court would likely preclude any of this testimony from the servicer.

Another proposal is to bring a quiet title or declaratory judgment action against the original lender before commencing the foreclosure action. There is Maine precedent that if the note holder and the mortgagee are not the same person, the note holder holds equitable title and the mortgagee holds legal title and further holds the mortgage in trust for the note holder. In equity, therefore, the note holder has the better title. Once a quiet title or declaratory judgment action results in a judgment in favor of the note holder, and that judgment has been recorded, the foreclosure could then be commenced.

As if the ruling concerning the MERS assignment was not bad enough, the court in Greenleaf also interpreted the Maine demand letter statute in a way that contradicted Maine practice. The court stated that the amount needed to cure the default must be fixed for the entire cure period, despite the fact that one or two additional monthly payments will come due if the borrower tenders the cure at the end of the 35-day cure period. Thus, in such an instance, the borrower will have “cured” the default but may still be one or two payments in arrears. Because most servicers’ demand letters were non-compliant with this new statutory interpretation, and since the foreclosure judges are, by rule, precluded from entering judgment unless they determine that the statutory demand letter requirements have been “strictly performed,” it is anticipated that many pending cases will be dismissed. In such a situation, the loan will need to be re-demanded, and after the new demand expires, the foreclosure will need to be recommenced.

Lastly, the Supreme Judicial Court raised the bar for the qualifications of a witness used to introduce business records. The court required that the witness be “intimately involved in the daily operation of the business” and that witness testimony show the first-hand nature of his or her knowledge of the servicer’s records. The court also established that the witness would need to testify as to how the servicer’s payment records are created, checked for accuracy, and accessed, and that the witness’s review of the records showed that the proper processes for creating, checking for accuracy, and accessing the records were followed for the loan in question. Thus, in order to obtain judgment (by motion or by trial), the proper foundation will need to be laid or the court may either dismiss the case (with or without prejudice) or enter judgment, with costs, for the defendant.

Conclusion
While the Greenleaf case has certainly revolutionized Maine foreclosure practice, significant questions remain open regarding how best to proceed to foreclosure, particularly in cases involving MERS and MERS assignments.

© Copyright 2014 USFN. All rights reserved.
September e-Update


1For example, the court referenced the following language: “[Borrowers] mortgage, grant and convey the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns), with mortgage covenants, subject to the terms of this Security Instrument, to have and to hold all of the Property to MERS (solely as nominee for Lender and Lender’s successors and assigns) and to its successors and assigns, forever … [Borrowers] understand and agree that MERS holds only legal title to the rights granted by [Borrowers] in this Security instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender’s successors and assigns) has the right: (A) to exercise any or all of those rights, including, but not limited to, the right to foreclose and sell the Property; and (B) to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument ... [Borrowers grant and mortgage to MERS (solely as nominee for Lender and Lender’s successors in interest) the property described [below

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Michigan: Mergers and Foreclosures by Advertisement

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Amy Neumann
Trott & Trott, P.C. – USFN Member (Michigan)

In the opinion of Federal Home Loan Mortgage Assn (sic) v. Kelley, Docket Number 315082 (June 24, 2014), the court dispensed with a due process challenge to foreclosures by advertisement in Michigan. The Michigan Court of Appeals held that the Federal Housing Finance Agency’s conservatorship of Federal Home Loan Mortgage Corporation (Freddie Mac) did not transform Freddie Mac into a federal entity for constitutional purposes. As a result, constitutional protections were not implicated and the due process challenge failed as a matter of law. This ruling is consistent with previous federal opinions within Michigan and across the country. See Herron v. Fannie Mae, 857 F. Supp. 2d 87 (D.C. Cir. 2012); see also Mik v. Federal Home Loan Mortgage Corporation, 743 F.3d 149 (6th Cir. 2014).

Of equal significance is the court’s decision on the requirement for recorded mortgage assignments in the merger context. At issue was whether CitiMortgage, Inc. was required to record its interest in the defendants’ mortgage prior to foreclosure, under MCL § 600.3204(3), when the mortgage interest was obtained pursuant to a merger. Prior to foreclosure, the Kelleys’ mortgage was assigned to ABN-AMRO Mortgage Group, Inc., which later merged into CitiMortgage. No assignment of mortgage was recorded from ABN-AMRO to CitiMortgage, due to the transfer of the mortgage by way of corporate merger.

The Court of Appeals opined that the foreclosure was voidable for failure to record an assignment of mortgage from ABN-AMRO to CitiMortgage. The court stated that an assignment of mortgage was required in order to provide a chain of title under MCL § 600.3204(3), which states “[i]f the party foreclosing a mortgage by advertisement is not the original mortgagee, a record chain of title shall exist prior to the date of sale under section 3216 evidencing the assignment of the mortgage to the party foreclosing the mortgage.” The court held that while the mortgage may have transferred to CitiMortgage through the merger, a recorded assignment was still necessary for purposes of the Michigan foreclosure statute.

The court of appeals went on to state that “defects or irregularities in a foreclosure proceeding result in a foreclosure that is voidable, not void ab initio.” Because the Kelleys failed to demonstrate prejudice resulting from the lack of a recorded assignment, they ultimately were not entitled to relief and the foreclosure was deemed valid.

The initial Kelley ruling, being contrary to industry standard practices, caused significant turmoil in the processing of foreclosures in Michigan where there was a merger in the chain of title. Given the significant impact of this decision, a motion for reconsideration was submitted in late July. An amicus curiae brief was also submitted by the Michigan Bankers Association in support of the reconsideration motion.

On August 26, the court vacated its prior decision of June 24, 2014, and issued a new one. In the new Order, the court determined that it did not need to address the assignment issue at all because the mortgagors did not allege that they were prejudiced by the lack of an assignment into the foreclosing entity. The due process ruling remained unchanged.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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New Mexico: Establishing Standing to Foreclose

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Sandra A. Brown
Little, Bradley & Nesbitt, P.A. – USFN Member (New Mexico)

On February 13, 2014, the New Mexico Supreme Court changed the landscape of the foreclosure map in New Mexico, by specifying when and how lenders need to establish standing to foreclose, and by providing further guidance on the New Mexico Home Loan Protection Act. [Bank of New York as Trustee for Popular Financial Services Mortgage/Pass Through Certificate Series # 2006 v. Romero, 2014-NMSC-007, 320 P.3d 1].

Romero presented the court with an intriguing and rare set of facts. The borrowers had signed a promissory note to refinance their home with Equity One, Inc. Two years later, Bank of New York proceeded to foreclosure, with a note attached to its complaint lacking any indorsements. The original note admitted into evidence at trial contained two indorsements: an indorsement to bearer from Equity One, and a special indorsement from Equity One to JPMorgan Chase. A witness for the current servicer of the loan testified at trial that his records indicated that the note had been transferred to the Bank of New York based upon a pooling and servicing agreement (which was not entered into evidence at trial).

The Supreme Court held that the lack of standing is a potential jurisdictional defect, which may not be waived, and may be raised at any time, even for the first time by the Supreme Court. The court further held that a lender is required to demonstrate, under the New Mexico Uniform Commercial Code, that it has standing to bring a foreclosure action at the time it files suit.

In Romero, the court determined that the explanation provided by the lender as to the indorsements contained on the original note was not sufficient to establish standing, as the indorsements were conflicting. The court found that without dates establishing when the conflicting indorsements were executed, it could not determine whether the indorsement to bearer or the special indorsement should control. The court further opined that Bank of New York could not establish itself as the holder of the note simply by possession of it, and that the court would not consider the fact that no one else was attempting to claim possession of the note as supporting Bank of New York’s status as note holder. Since this decision, the New Mexico Court of Appeals has issued subsequent decisions supporting the Supreme Court’s ruling, recognizing that a lender must be able to establish its standing at the time of the filing of its complaint. See Deutsche Bank National Trust Co. v. Beneficial N.M., 2014-NMCA-__, No. 31,503, 2014 WL 1819300; Bank of New York Mellon v. Lopes, 2014-NMCA-__, No. 32,310, 2014 WL 3670094.

Even though it noted that this issue was moot in the present case, the court also held that the New Mexico Home Loan Protection Act is not preempted by federal law, and that the ability of a borrower to have a reasonable chance of repaying a mortgage loan must be a factor in determining whether a “reasonable, tangible net benefit” was conveyed to the borrower, so as not to violate the anti-flipping provisions of the statute. See NMSA 58-21A-4(B) 2003. In Romero, the court found that such a benefit was not conveyed, despite the $43,000 that the borrowers received from the refinance, because the lender did not adequately consider the borrowers’ ability to repay the loan and relied on their self-reported income.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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New York: Delaying the Settlement Conference – Severe Penalty to Lender

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Bruce J. Bergman
Berkman, Henoch, Peterson & Peddy, P.C. – USFN Member (New York)

New York’s settlement conference mandate for home loan foreclosures visits much time and expense upon the action, as well as peril if there are assertions that the mortgage holder was not negotiating in good faith. A new case advises of yet further danger: elimination of interest otherwise due upon the mortgage for a lender’s delay in pursuing the settlement conference. [US Bank Nat’l Association v. Gioia, 42 Misc.3d 947, 982 N.Y.S.2d 699 (Sup. Ct. 2013)].

The case seemed to be benign. A foreclosure was begun on November 9, 2011, and the borrower answered on November 21st. However, the foreclosing plaintiff took no steps to proceed with the conference until April 2013. The plaintiff’s methodology during the conference process was a lesson in how not to do it — including not responding to a loan modification request — resulting ultimately in the plaintiff moving on August 8, 2013, to discontinue the action. That is the portion that seems innocuous; presumably a borrower would be pleased that the foreclosure action was about to evaporate.

In this case, however, the borrower cross-moved for an order compelling the tolling of interest on the obligation from commencement of the action and, further, halting interest accrual until a diligent review of the borrower’s eligibility for a permanent loan modification was completed. The borrower also sought an injunction against the plaintiff collecting legal fees from the beginning of the case.

Moreover, the borrower contended, were there to be a discontinuance, he would have to wait for a new action before the court could become involved anew in the settlement process. In addition, during discontinuance and the initiation of a new action, mortgage arrears, interest, and other costs mount, thereby decreasing the chance for a loan modification to come to fruition. In sum, a discontinuance would be prejudicial.

While the plaintiff’s counsel had some thoughtful responsive arguments, the court ruled that discontinuing the action would be prejudicial to the borrower and that the borrower was entitled to a conclusion of settlement negotiations before the action could be authorized for discontinuance.

Turning to the penalty aspect: Based upon the plaintiff’s delay, tolling of interest was declared retroactive to the beginning of the action until the case would be settled or removed from the settlement part. It would not be fair, the court found, to charge interest and penalties to the defendant during the period of the lender’s “unreasonable and unexcused delay.”

While new procedures in New York to some extent remove the ability of a foreclosing plaintiff to impede the settlement process, there is still room for delay. If that might be attributable to willful acts on the part of the plaintiff, this case is confirmation that meaningful monetary penalties can be imposed.

© Copyright 2014 USFN. All rights reserved.
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FDCPA: Split Among the Circuits Regarding the Validation of Debts and Disputes

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Holly Smith
South & Associates, P.C. – USFN Member (Kansas, Missouri)

There is a split of authority among the circuits as to whether or not a debtor must articulate a dispute in writing under the validation of debts section of the Fair Debt Collection Practices Act (FDCPA), specifically 15 USC 1692g(a)(3). This is certainly a topic for servicers to monitor because of the strict liability penalties imposed by the FDCPA.

15 USC 1692g states:

(a) Within five days after the initial communication with a consumer in connection with the collection of any debt, a debt collector shall, unless the following information is contained in the initial communication or the consumer has paid the debt, send the consumer a written notice containing —

 

(1) the amount of the debt;
(2) the name of the creditor to whom the debt is owed;
(3) a statement that unless the consumer, within thirty days after receipt of the notice, disputes the validity of the debt, or any portion thereof, the debt will be assumed to be valid by the debt collector;
(4) a statement that if the consumer notifies the debt collector in writing within the thirty-day period that the debt, or any portion thereof, is disputed, the debt collector will obtain verification of the debt or a copy of the judgment against the consumer and a copy of such verification or judgment will be mailed to the consumer by the debt collector; and
(5) a statement that, upon the consumer’s written request within the thirty-day period, the debt collector will provide the consumer with the name and address of the original creditor, if different from the current creditor.

 

 

Third Circuit — In 1991, the Third Circuit (comprised of Delaware, New Jersey, Pennsylvania, and the Virgin Islands) issued a decision that a consumer debtor must voice a dispute in writing that contests the validity of the debt, Graziano v. Harrison, 950 F.2d 107 (3d Cir. 1991). The Graziano opinion states: “that reading 1692g(a)(3) not to impose a writing requirement would result in an incoherent system in light of the explicit writing requirements stated in sections 1692g(a)(4)-(5) and 1692g(b).” Id. The court also concluded that written statements create a record of the dispute.

Ninth Circuit — Several years later, in 2005, the Ninth Circuit (comprised of Alaska, Arizona, California, Hawaii, Idaho, Montana, Nevada, Oregon, Washington, Guam, and Northern Mariana Islands) issued an opinion regarding 15 USC 1692g(a)(3) that the dispute need not be expressed in writing. Camacho v. Bridgeport Financial, Inc., 430 F.3d 1078 (9th Cir. 2005). The court recited four main reasons in its decision: (1) there are explicit contrasting writing requirements in the statute; (2) the statute provides for other protections in event of dispute that only depend on a dispute and not whether there was a prior writing; (3) the legislative purpose of allowing debtors to challenge the initial communication is furthered by permitting oral objections; and (4) reading the statute to conclude that some rights are triggered by oral disputes and others require a written statement would not mislead consumers.

Second Circuit — In May 2013, the Second Circuit (comprised of Connecticut, New York, and Vermont) decided a case, also based on 15 USC 1692g, with similar facts to the two cases referenced above. The Second Circuit decision agreed with the reasoning of the Ninth Circuit, holding that a dispute brought under 15 USC 1692g(a)(3) need not be in writing. Stating in relevant part, “the right to dispute a debt is the most fundamental of those set forth in 1692g(a) and it was reasonable to ensure that it could be exercised by consumer debtors who may have some difficulty with making a timely written challenge.” Hooks v. Forman, Holt, Eliades & Ravin, LLC, 717 F.3d 282 (2d Cir. 2013).

Conclusion

Consumer disputes are becoming increasingly common and although the cases cited here pertain to a very specific portion of the FDCPA, it is a part of the FDCPA that should never be ignored. Most importantly, because of the current split among the circuits, these decisions should be watched closely in all jurisdictions.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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New York: Level of Proof re the Sending of Pre-Foreclosure Notices

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Lijue Philip
Rosicki, Rosicki & Associates, P.C. – USFN Member (New York)

Increasingly, trial courts have been imposing a higher standard of proof on plaintiffs seeking to proceed with their foreclosure action. Recently, the appellate division ruled that a conclusory statement that a pre-foreclosure notice of default was sent is insufficient to establish that this contractual condition precedent was complied with. [Wells Fargo Bank, N.A. v. Eisler, 118 A.D.3d 982 (2d Dept. 2014)].

Eisler involved a contested residential foreclosure in which the borrowers interposed an answer, alleging among other things that the plaintiff had not sent a notice of default prior to commencing the action. The plaintiff moved for summary judgment to strike the answer and the borrowers cross-moved for dismissal, particularly alleging that the plaintiff had not sent a notice of default.

The trial court found that the plaintiff had submitted an unsubstantiated and conclusory affidavit stating that the notice of default had been sent in accordance with the terms of the mortgage, along with a copy of the notice of default. The court found that this was insufficient to establish that the notice of default was actually sent to the mortgagors by first-class mail to the address it was alleged to have been sent to. Therefore, the court granted the borrower’s cross-motion and dismissed the action. This dismissal was appealed.

The appellate division affirmed the dismissal. Echoing the trial court’s decision almost verbatim, the appellate division found that a simple declaration that the notice of default was sent “in accordance with the terms of the mortgage” is too vague and conclusory a statement to establish that the notice was in fact sent.

Mindful of the Eisler decision, in order to establish that such notice was sent, a plaintiff will likely have to attest to whom the notices were sent, when and where they were sent, and in what manner they were sent. Recommended practices would be to ensure that affidavits regarding the sending of a pre-foreclosure notice specify this information.

© Copyright 2014 USFN. All rights reserved.
September e-Update

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New York’s Proposed Debt Collection Regulations

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Robert H. King
Rosicki, Rosicki & Associates, P.C. – USFN Member (New York)

While we postulate about the debt collection rules from the federal Consumer Financial Protection Bureau (CFPB), on the state level, the New York State Department of Financial Services (DFS) closed the comment period for its revised proposed regulations on the debt collection industry, targeting non-originating debt collectors which includes servicers. This is the DFS’s second set of proposed rules to regulate the debt collection and servicing industry since July 2013.

Original creditors and their subsidiaries, affiliates, and employees are exempt. Attorneys acting in connection with a pending legal action to collect debt on behalf of a client, and organizations that provide non-profit credit counseling and debt liquidation, are exempt as well.

Statute of Limitations
— Of particular interest for servicers operating in the New York area is a provision relating to loans that may be close to reaching the statute of limitations. The new rule will require a servicer to develop reasonable procedures for determining if the loan is subject to an expiring statute of limitations. If the servicer knows or has reason to know the statute of limitations may have expired, the servicer would be required to send a notice to the borrower disclosing information warning the borrower about re-affirmation of the debt before they make a payment. The notice must also include a statement informing the borrower that a lawsuit commenced on expired debt violates the Fair Debt Collection Practices Act, 15 U.S.C.§ 1692, in addition to other specific disclosures. An acceptable form of the notice can be found within the body of the regulations.

In addition, the revised proposed rules set forth debt validation requirements and procedures, or what the DFS calls requests for substantiation. Under the proposed rule, whenever the borrower makes an initial oral or written request to validate the debt, the servicer must provide information as to how to request substantiation of the debt; there are deadlines for providing responses to those requests. If the debt was charged-off, meaning “… the accounting action taken by an original creditor to remove a financial obligation from its financial statements by treating it as a loss or expense …” the servicer must respond to the request within 60 days of receipt and must stop collection activities until validation is complete.

Rounding out the rules are requirements that will apply to situations when a debt payment schedule or other agreement to settle the debt is agreed upon, arguably including loan modification agreements. In those situations, the servicer is required to send written confirmation of the new payment schedule or agreement to settle the debt, and include the material terms, conditions, and a prescribed notice that the borrowers are liable for the new debt along with a list of income not subject to further collection. Further, the proposed rules impose a restriction on contacting borrowers by electronic mail without first obtaining the borrower’s consent to communicate in that manner.

Tellingly, the proposed rules fail to give any statement of statutory authority for DFS to promulgate these rules and enforcement provisions and penalties for non-compliance are not addressed. Servicers will need to institute processes to assess their New York portfolios to comply with these regulations, as well as to reconcile those processes with developing federal and state laws.

© Copyright 2014 USFN. All rights reserved.
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Delaware: Standing to Foreclose

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by James E. Clarke
Atlantic Law Group, LLC – USFN Member (Delaware)

Delaware Superior Court in E*Trade Bank v. Sanders (decided August 07, 2014) affirms the position that under Delaware contract law, a mortgage debtor lacks standing to challenge the assignment of mortgage, provided the assignment is properly executed. Under Delaware law, assignments of mortgage are effective upon proper execution, attested by one credible witness.

 

Last year in Citimortgage, Inc. v. Bishop (decided March 4, 2013), the superior court held similarly. E*Trade involved a series of assignments, including a MERS assignment. The court held that the assignments were properly executed and that the borrower debtor was without standing to challenge.

While many courts look to the note to determine standing, Delaware’s primary method of foreclosure, scire facias on mortgage, is a summary proceeding based on the recorded mortgage and/or assignments. The default is presumed by the complaint allegations and the burden of proof is upon the defendant to demonstrate under oath to the court why judgment of foreclosure should not be entered. Standing to foreclose is demonstrated by either an enforceable mortgage attached to the complaint or an enforceable mortgage along with a properly executed assignment.

Unlike other judicial actions, only the mortgagor, record owners if different, and persons with a legal or equitable interest are necessary defendants. Lienholders and tenants, however, are not necessary parties but receive mailed notice of the pending action as in many nonjudicial states. Likewise, a defendant’s permitted defenses are limited. Those defenses are payment or satisfaction of the debt, or avoidance. An avoidance defense must relate to the validity or illegality of the mortgage documents. Scire facias on mortgage derived from English Common Law and was originally codified by the Delaware Code of 1852.

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Connecticut: Judicial Foreclosure Sale Frustrations Caused by New Interpretation of Bankruptcy Stay

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by James Pocklington
Hunt Leibert – USFN Member (Connecticut)

Connecticut is a judicial foreclosure state with two forms of foreclosure. While the majority of foreclosures in the state go through the strict foreclosure process, when there is either equity in the property or the United States is a party, the court will order a judicial sale. Connecticut’s judicial sales are conducted by a “Committee for Sale,” an attorney appointed by the court to act as the agent of the court. Committees are bound be a number of standing orders affecting their responsibilities, expectations, timelines, and even permissible reimbursement.

In the recent judicial decision, Equity One, Inc. v. Shivers (150 Conn. App. 745l, 2014 Conn. App. LEXIS 254), which may be familiar to readers through prior decisions on standing, Connecticut’s Appellate Court reversed a lower court ruling that had awarded fees and costs to a committee awarded during a bankruptcy stay. This has created a substantial delay in court-agent reimbursement and a public policy concern.

As the reader is no doubt aware, the automatic stay provision in 11 U.S.C. § 362(a) prevents a judicial sale from proceeding. Historically, committees would bring a motion for approval of their interim fees and costs to be reimbursed for their expenditures as an agent of the court. Until Shivers, these fees and costs would be approved as, pursuant to Conn. Gen. Stat. 49-25, fees and costs for the cancelled sale are to be borne by the foreclosing plaintiff.

In Shivers, the court interpreted 49-25’s provision that says expenses “be taxed with the costs of the case” as the type of indemnification discussed in In re Metal Center, 31 B.R. 462, and determined that awarding interim fees for a cancelled sale, even if they are statutorily required to be paid by the plaintiff, to be action against the debtor in violation of the stay.

The impact of Shivers is still being felt. Connecticut’s committees for sale are volunteer appointment agents of the court, not dissimilar from guardians ad litem, and are now being forced to wait extended periods before being reimbursed for expenses incurred. While it is unclear if there will be a judicial or legislative response to this new interpretation, it may also impact the willingness of qualified applicants to volunteer, if they may not see a repayment of their expenses for significant time.

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Pennsylvania: Fees & Costs Case Update

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Louis P. Vitti
Vitti, Vitti & Associates, P.C. – USFN Member (Pennsylvania)

A recent Pennsylvania case, Glover v. Udren Law Offices, P.C., 92 A.3d 24 (Apr. 23, 2014), deals with alleged violations of the Loan Interest and Protection Act (Act 6), 41 P.S. §§ 101, et seq., as well as the Uniform Trade Practices and Consumer Protection Law (UTPCPL), 73 P.S. §§ 201-1, et seq. The court focused on the borrower’s claim that the statutes barred the collection of certain costs and fees by the defendant.

In an exhaustive examination of the relevant laws impacting this claim, the appellate court recapped the borrower’s argument thusly: “Because [41 P.S. § 502] provides a remedy against a person who collects excess fees and charges, and person is defined broadly to ‘include but not be limited to residential mortgage lenders,’ Glover [contends that he] can maintain a cause of action against the residential mortgage lender’s foreclosure attorney for collecting fees in excess of those described in [41 P.S. § 406]. Applying the principles of statutory interpretation, the court rejected Glover’s argument. “To do otherwise would require [the court] to rewrite § 406 and the conduct proscribed by it.”

The court concluded that, “As Udren is not a residential mortgage lender, it cannot violate § 406.” Further, the court affirmed the trial court’s dismissal of the UTPCPL claims, finding “that the UTPCPL does not apply to claims of attorney misconduct in the context of practicing law.” Since “all of Glover’s UTPCPL claims are based explicitly upon allegations regarding actions taken by Udren in connection with the filing of a foreclosure complaint,” they are not viable under the UTPCPL.

Of possibly greater import than the majority opinion described above is the lengthy dissent, which concurs (subject to a caveat) with the majority’s determination that no relief may be granted under the UTPCPL. The dissenting opinion, however, disagrees that the plaintiff failed to plead a claim upon which relief could be granted under Pennsylvania Act 6. The dissent suggests that “§ 406 prohibits the receipt of improper charges and interest, while § 502 prohibits the collection of such charges. This distinction further reinforces the inference that collection activity in violation of § 406, i.e., collection activity affiliated with [a residential mortgage lender’s] ultimate receipt of such charges, is prohibited, not just collection activity undertaken by the residential mortgage lender (RML), itself. What it is improper for an RML to receive, it is improper for an RML’s proxy to collect.”

Note that this is a Pennsylvania Superior Court case, and it may be considered by the Pennsylvania Supreme Court upon appeal. (Glover’s claims under Pennsylvania’s Fair Credit Extension Uniformity Act, 73 P.S. §§ 2270.1, et seq., and the federal Fair Debt Collection Practices Act, 15 U.S.C. §§ 1692, et seq., were dismissed by the federal district court prior to the commencement of the state action. See Glover v. Udren, 2011 WL 1496785 (W.D. Pa. 2011)).

Because of the extent of the thoughtful dissenting opinion, one may expect that a review of fees charged in accord with the instructions of Act 6 will be pursued and revisited by mortgagors in some future case.

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Rhode Island: Recent Changes to Mediation Statute

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Joseph A. Camillo, Jr.
Shechtman Halperin Savage, LLP – USFN Member (Rhode Island)

The foreclosure crisis has led many states to adopt mediation programs to improve communications between borrowers and lenders and achieve alternatives to foreclosure while stabilizing communities. Previously, Rhode Island enacted mediation legislation superseding several local ordinances. On July 8, 2014, the governor signed legislation amending the statute to clarify that process. It takes effect October 6, 2014, and Banking Regulation 5 will also be amended to incorporate these changes.

The new amendments provide significant changes to the 2013 statute. Specifically, the new law will mandate that mortgagees provide mediation notices to mortgagors prior to initiating foreclosure (subject to the exemptions), regardless of whether the date of delinquency is less than 120 days prior to September 13, 2013. Also, the previous exemptions from compliance were expanded to include reverse mortgages and non-first mortgages.

Furthermore, certain statutory definitions were clarified. Of particular significance is the definition of “mortgagor,” which was amended to eliminate non-borrower owners except to the extent they hold record title as an heir or devisee of a borrower and live in the property as their principal residence. This includes a representative of the estate appointed with authority to participate in a mediation conference. Additionally, “mortgage” was amended to mean a first-lien mortgage. Finally, “mortgagee” was amended to include agents or employees of a mortgagee, including a mortgage servicer acting on its behalf.

Previously, notice had to be sent by both certified and first-class mail. The new amendments change that requirement by simply providing that written notice to the mortgagor must be sent. The new amendments also eliminate the requirement for the plat and lot number to be included on the mediation notice.

One of the most significant changes is that R.I.G.L. 34-27-3.1 was repealed in its entirety, eliminating the 45-day notice of intent “NOI” requirement.

Another substantial change is the penalty provision for non-compliance with the statute. As the current statute reads, a mortgagee failing to send mediation notices within 120 days of delinquency must foreclose judicially under R.I.G.L. 34-27-1, et seq. Because, the Rhode Island judicial foreclosure process is somewhat undefined, title companies have been reluctant to opine as to what would be an insurable judicial foreclosure. This left many loans where the mediation notices were not sent within 120 days of delinquency, stalled as servicers wait for further direction. Under the new law, a mortgagee may now alternatively still proceed with mediation and nonjudicial foreclosure by paying a penalty of $1,000 per month until the notice is sent. These penalties will be paid directly to the mediation coordinator prior to completion of the mediation process. The aggregate penalty for violation has been capped for any servicer between the enactment of the original law (September 13, 2013) and the effective date of the amendment (October 6, 2014) to an amount of $125,000. Thus servicers should commence sending out notices for older loans fitting this description as soon as possible.

The amendment resolves many of the questions and issues that remained after the 2013 statute went into effect. In the months to come, it will be interesting to see the title insurance companies’ response as well as the penalty calculation methodology. Ultimately, the unified process and clarifications discussed above should facilitate compliance with the statute going forward.

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South Carolina: Bankruptcy Court Addresses Fees for Plan Review and Proof of Claim Preparation and Filing

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Ronald C. Scott and Reginald P. Corley
Scott Law Firm, P.A. – USFN Member (South Carolina)

Three cases were brought before the bankruptcy court regarding the attorney fees incurred for “Proof of Claim Preparation & Plan Review.” The fees in all three cases were $425, based on the Fannie Mae guidelines. The mortgage creditor did not respond to the debtor’s objection in the third case, so the court had insufficient facts to determine if the fee was reasonable. Here are some highlights of the court’s Order in the other two cases:

  • Bankruptcy Code Section 506(b) does not apply because the debtors are proposing to cure defaults through the plan. See Bankruptcy Code Section 1322(e); Deutsche Bank National Trust Co. v. Tucker, 621 F.3d 460, 464 (6th Circuit 2010).
  • Paragraph 9 of most standard Fannie Mae uniform mortgage instruments provides that such fees are secured by the mortgage and fall within the scope of doing what is reasonable to protect the creditor’s interest. (See page 11, footnote 2 of the Order.)
  • The court relies upon United Student Aid Funds, Inc. v. Espinosa, 559 U.S. __, 130 S. Ct. 1367 (Mar. 23, 2010), when determining that the services of an attorney are not unnecessary, due to the binding effect of a plan’s confirmation, even if treatment is improper.
  • In South Carolina, attorneys’ fees are recoverable only when authorized by contract or statute. See Baron Data Systems, Inc. v. Loter, 377 S.E.2d 296, 297 (S.C. 1989)
  • Where the contract provides for reasonable fees, the court considers the six factors in Dedes v. Strickland, 414 S.E.2d 134, 137 (S.C. 1992). All six factors weighed in favor of reasonableness. (The court does not express an opinion about the current Fannie Mae fee of $650.)
  • The fee of $425 was found reasonable in the two cases. However, the court observes in a footnote that the issue of whether or not the fees were earned at the time the notice was filed was not raised and could be an issue if challenged in the future.

Therefore, the payment (by the debtor) of the $425 fee noticed pursuant to Federal Rules of Bankruptcy, Rule 3002.1 is required by the underlying agreement and applicable non-bankruptcy law to cure a default or maintain payments in accordance with section 1322(b)(5) of the Bankruptcy Code.

The court did warn, however, that future 3002.1 notices must have a more detailed description of the services performed in order to satisfy Rule 3002.1(e).

Although this Order does not reach the subject of whether Rule 3002.1 would apply if the debtor is current at the time of filing, it does provide guidance as to the reasonableness of fees included in Rule 3002.1 Notices.

© Copyright 2014 USFN and Scott Law Firm, P.A. All rights reserved.
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Wholly Unsecured Lien Can be Stripped in a “Chapter 20” Case

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Elizabeth M. Abood-Carroll
Orlans Associates, P.C. – USFN Member (Michgan)

A bankruptcy appellate panel (BAP) in the Sixth Circuit recently reversed a bankruptcy court and ruled that a wholly unsecured lien can be stripped in a “chapter 20” case. In the bankruptcy world, a “chapter 20” is an unofficial term that refers to a debtor who files and completes a chapter 7 case and subsequently files a chapter 13 case in a short period of time.

The debtor in In re Cain, 2014 Bankr. LEXIS 3060 (BAP 6th Cir. July 14, 2014), obtained a chapter 7 discharge. A few months later, she filed a chapter 13 case seeking, in relevant part, to avoid a wholly unsecured second mortgage on her residence. Due to the chapter 7 discharge within the preceding four years, the debtor was not eligible for a discharge in her chapter 13 case, pursuant to 11 U.S.C. § 1328(f).

Upon the successful completion of her chapter 13 plan, the debtor filed a motion to avoid the second lien. The motion was unopposed. The bankruptcy court denied the motion by relying on 11 U.S.C. § 1325(a)(5)(B), which says a chapter 13 plan must provide for a secured creditor to retain its lien until either the debt is paid in full or the debt is discharged. Because the debt was not paid in full and the debtor was ineligible for a discharge, the bankruptcy court ruled that the debtor was not entitled to strip the second mortgage in her chapter 13 case.

The BAP found the lower court had erred in denying the lien strip. The B.A.P. recognized that the issue has not been addressed by the Sixth Circuit; and it relied on Lane v. W. Interstate Bancorp (In re Lane), 280 F.3d 663(6th Cir. 2002), which permits a lien strip on a debtor’s principal residence if it is wholly unsecured under 11 U.S.C. § 506(a). The relevant inquiry is whether the claim is secured or unsecured.

In regards to the debtor’s ineligibility to receive a discharge, the BAP ruled that ineligibility under § 1328(f) does not prevent the debtor from receiving other types of relief under Chapter 13.

In this case, there was no dispute that the second lien had no value. Consequently, the BAP ruled that second lien was to be treated as an unsecured claim and was not protected by the requirements of § 1325. The determining factor was the wholly unsecured status of the creditor’s claim rather than the debtor’s ineligibility for a discharge.

(Note: The Sixth Circuit is comprised of Kentucky, Michigan, Ohio, and Tennessee.)

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Wisconsin: Equitable Assignment Upheld

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Patricia Lonzo
Gray & Associates, L.L.P. – USFN Member (Wisconsin)

The Wisconsin Supreme Court upheld the long-standing theory of equitable assignment resulting in a victory for PHH Mortgage Corporation and, in turn, a victory for MERS in Dow Family, LLC v. PHH Mortgage Corporation, 2014 WI 56, 848 N.W.2d 728 (July 10, 2014). The court concluded that old law is good law as it pertains to equitable assignment. Having affirmed that equitable assignment is “alive and well in Wisconsin,” the majority opinion did not take issue with the MERS assignment. This decision exemplifies why it is important to maintain possession of the note and the records surrounding its custody. Possession of the properly endorsed note is what will win a case.

Dow Family has a unique set of facts. The court of appeals decision was previously reported on in the USFN’s September 2013 e-Update; therefore, the facts of this case might sound familiar to you. Dow Family purchased a property from PHH’s borrower. During that transaction Dow Family obtained a title commitment that indicated that there were three mortgages on the property. The commitment showed that the first and third mortgage were to US Bank. The mortgage in first lien position was actually to MERS as nominee for US Bank. This first mortgage is the mortgage now held by PHH. The mortgage was assigned to PHH from MERS after the Dow Family purchased the property. While the assignment was recorded after Dow purchased the property, PHH had been transferred the note and servicing of the loan shortly after its origination years earlier.

Dow Family had been convinced by the seller’s attorney that the first mortgage on title had been paid off in full by the subsequent mortgage on title to US Bank. The closing went ahead and Dow Family purchased the property without obtaining a satisfaction or release of the PHH mortgage. Nor were any closing funds applied to satisfy the PHH mortgage. The PHH Mortgage borrower then immediately defaulted on his mortgage. Once the true facts were revealed, that the first mortgage on title had not been paid off by the subsequent US Bank mortgage, Dow Family filed an action to extinguish the lien on the property and PHH initiated a foreclosure action.

The attorney for the Dow Family sought to paint his client as a victim of the MERS system. A system that, Dow Family argued, was unfair, deceptive, and deserving to be rejected in Wisconsin. Dow Family advanced a number of legal arguments attempting to support their position, including that the note and mortgage were separated and, alternatively, that the statute of frauds was violated resulting in an unenforceable mortgage.

Instead of rejecting the MERS system, the court rejected Dow Family’s arguments. The court found that equitable assignment is a valid legal theory stemming back to the 1800s in Wisconsin case law. The legal theory of equitable assignment focuses on the fact that the note is an inherently valuable document. When the note is transferred, the mortgage is transferred with it. The right to enforce the mortgage is equitably assigned to the new note holder by operation of law when the note is transferred. Assignments out of MERS do not typically take place until an event occurs making the assignment necessary, which may be years after the note was transferred. The court further found that equitable assignment has been codified in the Wisconsin Statutes in § 409.203(7).

The Dow Family decision strikes down the various legal arguments centered on the time delay between the transfer of the note and the recording of an assignment of mortgage. The lesson from Dow Family is not a new one but its importance cannot be overlooked; possession and production of the original note when necessary are crucial in a foreclosure action.

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CFPB Updates Informal Non-Binding Guidance on Servicing Transfers

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Wendy Walter
RCO Legal, P.S. – USFN Member (Alaska, Oregon, Washingtn)

On August 19th, the Consumer Financial Protection Bureau (CFPB or Bureau) replaced its February 2013 guidance directed at servicers and related to servicing transfers with Bulletin 2014-01. This new bulletin gets into detail on the recent issues the Bureau has found in examinations of servicers engaged in servicing transfers. The bulletin also discusses application of the new servicing rules in a service transfer situation and outlines a new disclosure process for certain loan servicing transactions.

Findings in recent examinations
— Based on recent examinations conducted by the Bureau, it was discovered that servicers failed to properly identify loans that were in a trial or permanent modification with the prior servicer at the time of transfer. Also it found that transferee servicers failed to honor trial or permanent modifications that were offered by the prior servicer. The Bureau is also concerned with finding that borrowers have had to resubmit financial documents to the transferee servicer because the prior servicer did not send the transferee servicer the complete record. These situations are deemed by the Bureau to be in violation of UDAAP (Unfair and Deceptive Acts and Practices) prohibition and if they occurred after January 10, 2014, they potentially violated the requirements for the servicers to have policies and procedures to avoid issues when a loan is being service-transferred. 12 CFR 1024.38(b)(4).

Application of Servicing Rules to Service Transfer Situations — In the non-binding guidance, the Bureau also points out that if there is a service transfer, the transferee servicer might have to comply with the early intervention and written notice requirements again even though the default originated with the prior servicer. This is confusing for a borrower, but it could set the clock back on pre-foreclosure loss mitigation because of a servicing transfer. Another highlight from this section is that the Bureau indicates that its examiners will heavily scrutinize any servicer that takes longer than 30 days from receipt of a complete loss mitigation application at the transferor servicer where the borrower could suffer negative consequences because of the delay.

Disclosure of Service Transfer Plans in “Appropriate” Cases — In certain cases (probably larger portfolio sales), the CFPB will require a servicer to submit plans to the Bureau, prior to the transfer, explaining how it is going to manage associated customer risks. The CFPB, in turn, will use these plans to help formulate a subsequent examination that the Bureau may conduct post-transfer.

For more information, here is a link to the bulletin on the CFPB’s website: http://files.consumerfinance.gov/f/201408_cfpb_bulletin_mortgage-servicing-transfer.pdf.

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Alaska Supreme Court: Unfair Trade Practices Act Does Not Apply to Nonjudicial Foreclosures

Posted By USFN, Friday, August 29, 2014
Updated: Tuesday, October 13, 2015

August 29, 2014

 

by Richard Ullstrom
RCO Legal - Alaska, Inc. – USFN Member (Alaska, Oregon, Washington)

The Alaska Supreme Court recently issued a ruling concerning the reach of Alaska’s Unfair Trade Practices Act (UTPA). The court reaffirmed earlier decisions holding that the UTPA did not apply to real property transactions and that, despite recent amendments to the statute, this exclusion applies to nonjudicial deed of trust foreclosures on real property.

Alaska’s UTPA prohibits “unfair or deceptive acts or practices in the conduct of trade or commerce.” A person suffering damages from a violation may recover the greater of three times actual damages or $500. Even without damage, a plaintiff may obtain an injunction against the alleged violator. But probably most important, successful plaintiffs may recover their actual attorneys’ fees and costs incurred in bringing the action. This provision has created a strong incentive for plaintiff attorneys to bring UTPA claims in foreclosure challenges.

In Alaska Trustee, LLC v. Bachmeier, the plaintiff alleged that the foreclosure trustee had violated the UTPA by including in a reinstatement quote the fees and costs incurred in processing the foreclosure. Because the foreclosure statute referred only to “attorney fees and court costs” instead of “trustee fees” or “foreclosure costs,” the borrower asserted that the inclusion of the foreclosure expenses was not permitted and that doing so was a UTPA violation. The trial court agreed, and the trustee petitioned the Supreme Court for review.

On review, the court held that inclusion of the foreclosure expenses in the quote was proper and that, consistent with precedents holding that the UTPA did not apply to real property transactions, the UTPA did not apply to nonjudicial deed of trust foreclosures on real property. It rejected Bachmeier’s argument that two recent amendments had overturned this line of authority.

The 2007 Mortgage Lending Regulation Act brought certain mortgage lending practices within the UTPA but, as the foreclosure trustee did not originate mortgage loans, the amendment was inapplicable. The 2004 amendment defining “goods or services” to include those “provided in connection with … a transaction involving an indebtedness secured by a borrower’s residence” also did not help Bachmeier. The amendment’s language did not change the longstanding exclusion of real property transactions from the types of goods and services included in the UTPA. The legislative history supported this conclusion, showing that the bill including the amendment had been concerned only with telephonic solicitations. There was no suggestion that the legislature had intended to bring real estate transactions in general, or foreclosures in particular, within the UTPA.

By eliminating the ability of plaintiffs’ attorneys to recover full fees by claiming a UTPA violation, the Bachmeier decision should greatly reduce the number of frivolous foreclosure challenges in Alaska.

To view the court’s opinion, follow this link: http://www.courtrecords.alaska.gov/webdocs/opinions/ops/sp-6935.pdf.

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North Carolina: Legislative Updates

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Jeffrey A. Bunda & Sarah D. Miranda
Hutchens Law Firm
USFN Member (North Carolina)

Unlike many states, the North Carolina General Assembly seems to be reversing the Great Recession-era trend of increasing consumer protection by, instead, repealing certain regulations and streamlining the process of liquidating distressed property. Amendments were made last year to three state statutes that are relevant to servicing loans in North Carolina.

Powers of Attorney
— The first of those changes involve the recording requirements for powers of attorney. The legislature sought to address questions about where and when a power of attorney (POA) should be recorded when the selling entity may own property in multiple counties across the state, but has its power of attorney recorded in only one county. This situation arises most often in an REO context. Under the old statute, there was no way to tell whether the conveying entity had authority to act for the principal (e.g., a servicer executing a deed) unless the conveying deed specifically referenced the deed book and page of the recorded POA. A title searcher attempting to determine if there was authority for the attorney-in-fact to sign the conveyance deed would have to search all North Carolina counties or guess at the county in which the POA might have been recorded.

N.C.G.S. Section 45-28, as re-written, provides new clarity by requiring that a POA affecting real property shall be registered in the county in which the principal is domiciled or where the real property is located. If the principal is not a NC resident, the POA may be recorded in any county in the state where the principal owns real property. If that real property lies in more than one county, the POA shall be registered in any one of those counties. The revised statute, which went into effect June 26, 2013, goes on to state that if the conveying deed is recorded in a different county other than the one where the POA is registered, the conveyance must contain the recording information for the POA in order for it to be located. It should be noted that failure to comply with the new statute does constitute an infraction; however, it will not affect the validity or enforceability of the conveyance deed from the bank to the new owner. While the practical effect of this legislation may seem onerous to servicers liquidating statewide portfolios, this legislation will cut down on REO-related inquiries, delays in closings, and even lost contracts by comforting the buyer that the attorney-in-fact indeed has authority to act for the principal.

Evictions — The next legislative amendment is important to note in the context of evictions. North Carolina House Bill 802 revised portions of the existing landlord and tenant law by shortening the time periods for judgments to be entered from previously “not in excess of ten days” to requiring judgment on the same day on which the conclusion of all the evidence and submission of legal authority occurs. In addition, the bill also shortened the time period for a landlord to dispose of personal property remaining on the premises after the landlord has been given possession. The previous ten-day period has been replaced with a shorter seven-day period to dispose of personal property remaining on the premises following lawful possession by a landlord. During the seven-day period, the landlord may move the personal property for storage purposes, but shall not throw away or otherwise dispose of such personal property prior to the expiration of the seven-day period. These changes apply to all evictions on or after September 12, 2013, and assist the servicer during the post-lockout period to promptly dispose of any personal property and transfer the asset into its REO portfolio.

COB Authority re Foreclosure Suspension — Lastly, the most dramatic reversal in North Carolina’s mortgage servicing legislation is the outright repeal as of August 23, 2013, of the Commissioner of Banks’ (COB) authority to unilaterally suspend foreclosures if it suspected that a “material violation” of law occurred with either the origination or the servicing of the loan. In 2008 and 2009, the consumer advocacy groups persuaded the General Assembly to enact sweeping reforms to existing North Carolina foreclosure and servicing law, including the adoption of the S.A.F.E. Mortgage Licensing Act. This act gave broad power to the COB to regulate previously unregulated servicers and exercise broad authority over servicing activities — especially in the context of foreclosure. N.C.G.S. Section 45-21.16B gave the commissioner the authority to prohibit the clerk of court from considering a foreclosure petition if, in its own discretion, it felt that a violation of prevailing origination and servicing law (state and federal) had occurred. This “stay” was only good for 60 days. Regardless, the law left the servicer no avenue for appeal or for due process unless it was able to persuade the commissioner’s office that, in fact, no material violation of origination or servicing law had occurred.

The program was enacted as part of the legislation that created the North Carolina State Home Foreclosure Prevention Project (SHFPP), which was in response to the subprime mortgage crisis that preceded the Great Recession in the final years of the last decade. The purpose of the SHFPP was to inform homeowners about governmental and non-profit homeownership preservation assistance. The commissioner also oversaw this program.

Shortly after the SHFPP was renewed in 2010 (and expanded to include all “home loans”), oversight of the SHFPP was transferred to the North Carolina Housing Finance Agency (HFA). The legislation that transferred the oversight of the SHFPP to the HFA, however, did not give it the power to “suspend” foreclosures. This power remained with the COB. The General Assembly recognized, though, that since the COB no longer had its hand in foreclosures, it should not have a role in deciding whether to suspend a foreclosure. Accordingly, this power, although rarely used, was removed from the COB, but the HFA did not receive it.

Conclusion — This article is meant only as a summary of some of the statutory revisions relevant to mortgage servicers, and the authors recommend that servicers contact their local NC counsel for more detailed information on how to ensure compliance with the legislative changes.

© Copyright 2014 USFN. All rights reserved.
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The Big Switch: MSRs from Bank to Nonbanks Effects on Default Servicing

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Robert Schneider
Ronald R. Wolfe & Associates, P.L.
USFN Member (Florida)

Background
On February 9, 2012, the five largest mortgage servicers in existence at the time reached an agreement (National Mortgage Settlement) with the federal government and 49 states to address an array of default servicing concerns that had been raised initially by consumers, and later lawmakers. Since that time, far-reaching federal regulations (see, e.g., 2013 Real Estate Settlement Procedures Act (Regulation X) and Truth in Lending Act (Regulation Z) Mortgage Servicing Final Rules) have been enacted and implemented, creating stringent default servicing policies regarding the handling of everything from lender-placed insurance to loss mitigation.

During this same period there has been a noticeable, parallel trend within the mortgage servicing industry to shift mortgage servicing rights (MSRs) of residential mortgages from these very same large bank servicers to nonbank servicers. While such moves may have initially gone relatively unnoticed, nonbank servicers and those traditional banks transferring servicing rights to them, have come under regulatory and political scrutiny due to the transfer of MSRs.

Most of the servicers subject to the National Mortgage Settlement continue to maintain large servicing portfolios. That being said, nonbank servicers’ portfolios no longer pale in comparison. In 2011, the ten largest mortgage servicers were traditional banks, whereas four of the top ten servicers by portfolio size are now nonbanks. Due to this recent and relatively rapid MSR acquisition, along with the retreat of some banks from residential mortgage servicing, nonbank servicers are experiencing growth. With this growth, however, come unavoidable growing pains.

Loss Mitigation Implications

The CFPB’s regulatory effects on loss mitigation, generally, have been explored at length in other USFN articles (see, e.g., CFPB: Mortgage Servicing Final Rules – Loss Mitigation by Andrew Saag in this edition of the USFN Report, as well as CFPB Amendments to the 2013 Mortgage Rules by Donna Case-Rossato and Wendy Walter, and CFPB: Mortgage Servicing Final Rules under RESPA (Reg X) by Wendy Walter). Still, the applicability of those loss mitigation rules may come into question, for example, when a loan service releases after a short sale has been approved, or a service transfer occurs after the borrower has submitted documents for modification review.

In the case of a modification, federal regulations dictate that the transferee servicer must have policies and procedures in place to identify whether a modification agreement exists, but the transferee servicer is still largely dependent on the transferor servicer to provide sufficient information such that it can determine whether or not a loan should still be placed on a loss mitigation hold. Even more commonplace are the issues that arise when a transferee servicer is generally aware of loss mitigation activity between the prior servicer and the borrower, subjecting the loan to a CFPB hold, but is not in possession of proof of loss mitigation from the transferor servicer such that a court would be willing to continue a final hearing and allow loss mitigation activity to occur without a final dismissal of a pending foreclosure. These issues are becoming more prevalent and may result in misunderstandings that become the subject of litigation.

Litigation Implications

What transferee servicers are even more likely to encounter are new defenses being raised in litigation, solely on the basis of the transfer of MSRs. In judicial states like Florida, many cases have been delayed through litigation for years, and courts are often setting aged cases for trial on the court’s own volition. This can present a problem when the servicing rights for a delinquent loan transfer to a new servicer anywhere from a few months to only a few days before trial.

At trial, whether the action was filed in the name of the servicer or the loan’s investor, it is often the servicer that will provide a representative to testify regarding the delinquent status of the loan. Given that the servicer will be called upon to testify regarding not only the total amount due but also the fulfillment of conditions precedent, and the ability of it or the investor to bring the action, this can become rather difficult when limited information is available to the acquiring servicer. (See. e.g., Hunter v. Aurora Loan Services, LLC, 2014 WL 1665739 (Fla. 1st DCA 2014)). From a practical perspective, such late transfers are also likely to put a strain on the travel schedules of the acquiring servicer’s representatives.

In a perfect world, litigation issues emanating solely from the transfer itself (i.e., a witness’s knowledge of the creation and maintenance of the loan records) would be resolved through cooperation between the releasing and acquiring servicer. By simply having the prior servicer present at a trial or an evidentiary hearing to testify regarding what that servicer’s records show with respect to the amounts due and owing could make up for the lack of knowledge of the new servicer. In reality, however, most MSR sales present a relatively clean break for the transferor servicer, requiring the transferee servicer to sometimes settle matters set for final hearing on the basis that it lacks the necessary information to prosecute a pre-existing foreclosure.

Political and Financial Implications

On a much larger scale, what nonbank servicers and traditional bank servicers will likely encounter for the remainder of 2014 and beyond is increased political scrutiny. New York, no stranger to the politics of foreclosure and mortgage servicing, wasted little time before publicly calling into question the trend of traditional banks transferring MSRs to nonbanks. On February 12, 2014, the Superintendent of Financial Services for the State of New York spoke at the New York Bankers Association Annual Meeting. The view elucidated by the superintendent about the trend of nonbank MSR acquisitions, when painted in the best light, can be described as apprehensive. In the most genuine light, it can better be described as distrustful. Superintendent Lawsky has called the trend “troubling” and took issue with what he viewed as “disproportionately distressed” servicing portfolios of nonbank servicers who “cut corners.”

While Lawsky’s stated belief of the cause of the trend is relatively undisputed (the creation of more demanding capital requirements for traditional banks already holding mortgage servicing rights), his provocative statements make clear that he and others like him will be scrutinizing the transfer of MSRs and will be vocal as they do so. He stated that he viewed the trend as an “extraordinarily challenging issue” that his office “must confront.” Lawsky made good on his statements when he effectively halted a $39 billion MSR transfer between a traditional bank and a nonbank two weeks later. That transfer remains in limbo at the time of this writing.

Conclusion
Every industry goes through changes and the mortgage servicing industry is clearly no exception. After the Great Recession, the United States financial industry, and the mortgage servicing industry in particular, were understandably subjected to increased regulation and scrutiny. It appears, however, that even as servicers exit the industry or scale back on their servicing involvement, they will still be very much under the microscope of the regulatory and political powers.

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Summer 2014 USFN Report

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The Continuing Saga of Eminent Domain of Mortgages By Local Governments in California

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Kayo Manson-Tompkins
The Wolf Firm
USFN Member (California)

The concept of eminent domain being used by local governments in California to seize underwater mortgages began in 2012. This concept was created not by local governments, but by a private entity named Mortgage Resolution Partners (MRP). The concept was to have local governments use eminent domain to seize underwater mortgages, permit private investors to purchase an existing mortgage at a discounted rate and then create a new mortgage at the reduced amount thus reducing the payment for the borrower. MRP spearheaded this concept due to the number of foreclosures that might result in vacant properties which, in turn, would blight local communities. Although on the surface it may seem that this concept was for the betterment of the public, in actuality this “concept” appears to be a private entity taking private property for a private use.

The True Meaning of Eminent Domain

California Constitution Article I § 19 grants state and local governments the power of eminent domain, where private property is taken for public use upon payment of just compensation. Typically eminent domain is used to take over structures to clear the path for a highway, road, public school, post office, fire department, library, or other structure for use by the public. This section also enables state or local governments to exercise the power of eminent domain for the purpose of protecting public health and safety, preventing serious criminal activity, responding to an emergency, or remedying environmental contamination that poses a threat to public health and safety.

This section does not, however, grant the power to state or local governments to exercise the power of eminent domain for the purpose of taking private property for private use. Furthermore, this section does not allow a local government to use the power of eminent domain to strong-arm lenders to take less than just compensation for the sale of its loans even if such sale were to result in the owner of a residence being allowed to remain in the property. Nor does it allow a private entity to facilitate a new mortgage with lower payments for the owner, obtain closing fees, and then share fees with the local government that used the power of eminent domain to enable the taking.

California Statute Governing Eminent Domain

Pursuant to California Code of Civil Procedure § 1240.030, the power of eminent domain may be exercised to acquire property for a proposed project only if all of the following are established: (a) The public interest and necessity require the project; (b) The project is planned or located in the manner that will be most compatible with the greatest public good and the least private injury; and (c) The property sought to be acquired is necessary for the project.

As indicated above, although the justification indicated for using eminent domain is to avoid blight in the community, which is a public purpose, the taking of an underwater mortgage ultimately benefits the owner of the private property and not the public as a whole. Therefore, what MRP and the local governments are attempting to do by using eminent domain does not meet the requirements of CCP § 1240.030.

San Bernardino County
The attempt to use eminent domain powers by local governments is not new to California. MRP first approached the County of San Bernardino with this proposal. The county formed a joint-powers authority with the cities of Ontario and Fontana in order to consider MRP’s proposal. Once the news was out about MRP’s proposal, numerous industry groups including the American Bankers Association, the California Bankers Association, and the Mortgage Bankers Association, banded together to oppose this proposal. Furthermore, U.S. Rep. John Campbell (R-Irvine, CA) introduced legislation to prohibit government sponsored entities (GSEs) from purchasing or guaranteeing loans in counties or cities that use eminent domain to seize underwater mortgages. On August 9, 2012, the Federal Housing Finance Administration said it “has significant concerns about the use of eminent domain to revise existing financial contracts, the resulting loss of which will ultimately be borne by the taxpayers and would have a chilling effect on the extension of credit to borrowers and investors.” As a result of this tremendous outcry, the JPA decided against considering MRP’s proposal.

City of Richmond
When San Bernardino County decided against MRP’s proposal, and due to the impending federal legislation, MRP set its sights on the city of Richmond, California. Richmond’s seizure program is limited to loans held by residential mortgage-backed securitization trusts (RMBS Trusts) and excludes GSEs and loans held by banks. This is to minimize opposition from local banks and federal agencies and target only performing loans that were under water. The seizure program is intended to assist homeowners at risk of defaulting on their mortgage loans and thereby somehow avoid urban blight. However, as indicated above, the target is “performing loans.” In actuality, it is intended to generate significant sums for MRP and its investors with payment to the city in exchange for the use of its eminent domain powers, and will likely generate private benefits for the homeowners selected. The seizure program conflicts with federal power under the Commerce Clause. It runs afoul of the Contracts Clause. In effect, the city seeks to abrogate debts of its citizens owed to out-of-town entities and permit a local speculator to reap the profits.

The city of Richmond contacted the RMBS Trusts, proposing to purchase the mortgages at 80 percent of the fair market value. When the RMBS Trusts declined, the Richmond’s mayor sent a letter to the RMBS Trusts on July 31, 2013, stating that if the financial institutions do not cooperate, the city will seize the loans using eminent domain in the following fashion: (1) have a condemnation hearing; (2) file an eminent domain suit in California; and (3) use an expedited procedure known as “quick take” to obtain a court order giving the city possession of the loans. As a result of the threatened action, the securitized trusts of Wells Fargo Bank and Deutsche Bank filed a lawsuit seeking injunctive and declaratory relief against the city of Richmond in the U.S. District Court for the Northern District of California. A similar suit was filed by the securitization trust of Bank of New York Mellon. Unfortunately, these cases were both dismissed within two months of the filing. The court held that a claim is not ripe if it rests on “contingent future events that may not occur.” Furthermore, it held that the Fifth Amendment taking claim asserted by the RMBS Trusts was premature until the government had in fact taken something and denied just compensation. The RMBS Trusts filed appeals in the U.S. Court of Appeals for the Ninth Circuit, which were consolidated by the court; however, the appeals were dismissed on May 21, 2014.

The city of Richmond is one vote short of approving the MRP proposal. There are several other municipalities (North Las Vegas, NV; El Monte, CA; La Puente, CA; Orange Cove, CA; Pomona, CA; and San Joaquin, CA) and likely more in further states, that are waiting to hear whether the city of Richmond proceeds with its efforts to exercise its powers of eminent domain. Until then, the saga of eminent domain of mortgages by local governments in California will continue.

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Summer 2014 USFN Report

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HOA Talk: Connecticut: Special Assessments Part of Priority Debt?

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by James Donohue
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

The question before the court in Cedarwood Hill Estate Condo. Ass’n v. Danise, 57 Conn. L. Rptr. 164 (Nov. 8, 2013), was whether “special assessments” should be considered part of the priority debt as defined by C.G.S. § 47-258(b) and modified by Public Act 13-156.

In Connecticut, § 47-258(b) gives an HOA a priority debt over a first or a second mortgage. Public Act 13-156, which became effective in June 2013, inter alia, specifically excludes late fees, interest, or fines from the calculation of the priority debt. The Act also extends the priority to include nine months of common expense assessments based on the periodic budget adopted by the association from the previous amount of six months. As noted in the court’s decision, “common expense assessments” is not defined in § 47-258(b). While the plaintiff HOA asserted that special assessments are adopted by the association as part of the periodic budget and, therefore, are includable in the priority debt, the defendant mortgagee contended that special assessments fall under other assessments, which do not enjoy the priority status.

The court stated “late fees, interest, and fines are excluded by the new language of the Public Act, and they do not otherwise appear to meet the common sense definition of common expense assessments based on a budget adopted at least annually by the association.” The court then went on to say “[t]his categorical difference supports the plaintiff’s position that the special assessments in this case, which are common to all unit owners, are common expense assessments for the purposes of § 47-258(b).”

At the initial judgment hearing, the court found that the affidavit of debt provided by the plaintiff was insufficient and denied the judgment without prejudice. After argument, the plaintiff submitted an updated affidavit, which specifically asserted that the special assessments were adopted as part of the annual budget. The court then granted judgment to the plaintiff, finding the priority debt to include the special assessments.

While not all assessments may be included in the nine-month priority, when an HOA can provide evidence that the assessment was approved as part of the annual budget process and is assessed as to all units, it can be part of the priority calculation. As the priority debt is the payment needed for a defendant mortgagee to redeem the property in the HOA’s foreclosure action, it is beneficial to review affidavits of debt carefully so as not to be overcharged.

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Summer 2014 USFN Report

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Connecticut: Public Act 14-89

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Robert Wichowski and David Borrino
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

Connecticut Public Act 14-89 (formerly House Bill 5353) (the Act) has been signed into law. The Act will significantly affect the business of mortgage servicing in Connecticut. The Connecticut Department of Banking was the impetus for legislative adoption of the Act, which is formally entitled, “An Act Concerning Mortgage Servicers, Connecticut Financial Institutions, Consumer Credit Licenses, The Foreclosure Mediation Program, Minor Revisions to the Banking Statutes, The Modernization of Corporation Law and Reverse Mortgage Transactions.”

The Act creates licensing, reporting, bonding, a code of conduct, and other requirements for mortgage servicers. It also extends the sunset date for the state’s mediation program into 2016 and creates a task force to examine reverse mortgages (home equity conversion mortgages). A copy of the full text of the Act can be found here: http://www.cga.ct.gov/2014/act/pa/pdf/2014PA-00089-R00HB-05353-PA.pdf.

Mortgage Servicing Licensing and Regulation

Section 4 of the Act requires, as of January 1, 2015, any entity that services mortgages in Connecticut that is not a federally-insured bank, out-of-state bank, credit union or federal credit union (or any wholly owned subsidiary), or that is not licensed as a mortgage lender or mortgage correspondent lender in Connecticut to obtain a license to continue to service mortgages in Connecticut.

Section 5 sets forth licensing prerequisites. To obtain a license, an entity needs to have a “qualified person” at its main office and each branch office. A qualified person is required to have supervisory authority at the office location and to have had at least three years’ experience in the mortgage servicing business within the five years immediately preceding the application. Experience in the mortgage servicing business is defined as paid experience in the: (1) servicing of mortgage loans; (2) accounting, receipt, and processing of payments on behalf of mortgagees or creditors; (3) supervision of such activities or (4) any other experience as determined by the Connecticut Commissioner of Banking (Commissioner). No person with any supervisory authority at the office for which the license is sought can have been convicted of, or pled guilty or no contest to, in a domestic, foreign or military court: (1) a felony within the seven years prior to the application; or (2) a felony involving fraud, dishonesty, breach of trust, or money laundering at any time. An applicant shall demonstrate the financial responsibility, character, and general fitness of any person who shall have supervisory authority at the office for which the license is sought. The applicant will need to provide a statement specifying the duties and responsibilities of the person’s employment including dates of employment and contact information of a supervisor, and an employer or business reference (if self-employed). The Act also allows the Commissioner to conduct criminal and background checks and requires fingerprints be submitted. There is an application fee of $1,000, which is required to be submitted with the application. (All fees required by the Act are non-refundable.) The Act also provides for automatic license suspension after notice from the Commissioner.

Section 6 contains filing requirements. The Act institutes an annual filing requirement for mortgage loan servicers. At least annually, the servicer shall file with the Commissioner a schedule of the ranges of costs and fees it charges mortgagors for its servicing-related activities and a report detailing a mortgage servicer’s activities in the state including the following: (1) the number of residential loans serviced; (2) the type and characteristics of the loans; (3) the number of serviced loans in default with a breakdown of 30-, 60-, and 90-day delinquencies; (4) information on loss mitigation activities, with details on workout arraignments undertaken; and (5) information on foreclosures commenced in the state.

Additionally, the servicer must notify the Commissioner at least 30 days prior to the servicer changing its name and provide an endorsement, amendment, or rider to the bond, and evidence of errors & omissions insurance. Also, the servicer must notify the Commissioner within five business days of any of the following: (1) Files for bankruptcy or consummates a corporate restructuring; (2) Is criminally indicted, or receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock is indicted for, or convicted of, a felony; (3) Receives notice of the institution against it of license denial, cease and desist, suspension or revocation procedures, or other formal or informal regulatory action by any governmental agency and the reasons for the action; (4) Receives notice that the attorney general of this or any other state has initiated an action, presumably against the licensee, and the reasons for it; (5) Knows that its status as an approved seller or servicer has been suspended or terminated by the Federal National Mortgage Association, Federal Home Loan Mortgage Corporation or Government National Mortgage Association; (6) Receives notice that certain of its servicing rights will be rescinded or cancelled, and the reasons why; (7) Receives notice that any of its officers, directors, members, partners, or shareholders owning 10 percent or more of its outstanding stock has filed for bankruptcy; or (8) Receives notice of a consumer class action lawsuit against it that is related to the operation of the licensed business.

Section 7 contains license terms and fees and provides that each license will expire on December 31 of the year that it is issued, unless renewed. If the license is approved on or after November 1, the license will expire December 31 of the following year. The Act specifies that an application for license renewal must be filed between November 1 and December 31 of the year in which the license expires.

Section 8, effective October 1, 2014, requires every mortgage servicer applicant or licensee and specified mortgage lending licensee to file with the Commissioner, a surety bond, a fidelity bond and evidence of errors and omissions coverage. The surety bond must be in the amount of $100,000 per office location and run concurrently with the term of the mortgage servicing license. The surety bond must be conditioned on the applicant faithfully performing any and all written agreements with or for the benefit of mortgagors and mortgagees; faithfully accounting for all funds received in connection with mortgage servicing operations and complying with the law.

The fidelity bond and errors and omissions coverage must include the Commissioner as an additional loss payee. The amount of the bond and coverage is based on the servicer’s volume of servicing as reported to the Commissioner.

Section 9, effective October 1, 2014, requires every mortgage servicer licensee and specified mortgage lending licensee maintain adequate records of each loan, or make such records available at the request of the Commissioner and requires that such records be maintained for at least two years after the loan has been service released or paid off. The records can be presented to the Commissioner at his office, or mailed registered or certified or sent via any express delivery carrier that provides a dated delivery receipt, within five days of such request by the Commissioner. The records shall include: (1) an itemized loan history; (2) the original or an exact copy of the note, mortgage, or other evidence of the debt; (3) the name and address of the mortgage lender, mortgage correspondent lender, and mortgage broker, if any; (4) copies of any state- or federally-required disclosures or notifications; (5) a copy of any approved bankruptcy plan, (6) a communications log, and (7) a copy of any notices sent to the mortgagor related to any foreclosure proceeding.

Section 10, effective January 1, 2015, provides that, upon assignment of servicing rights of a residential mortgage loan, the mortgage servicer must disclose to the mortgagor any required RESPA or TILA notice, together with a schedule of the ranges and categories of its costs and fees for its servicing-related activities.

Section 11, also effective January 1, 2015, obligates mortgage servicers to comply with all applicable federal laws and regulations relating to mortgage loan servicing, in addition to any other remedies; failure to do so may be grounds for the Commissioner to take enforcement action under Section 15 of the Act (see below).

Section 12 institutes a requirement that a mortgage servicer shall maintain a schedule of fees and costs that it charges mortgagors for servicing-related activities. In instances where there is no set fee, the schedule shall contain a range of fees. Section 12 also imposes a restriction on mortgage servicers from imposing a late fee or delinquency charge when the only delinquency is attributable to a late fee or delinquency charge on an earlier payment when such payment would have been a full payment but for such charges. Section 12 is effective on January 1, 2015.

Section 13, effective January 1, 2015, establishes a code of conduct for mortgage servicers. (See the discussion of section 17 below and the statutory ambiguity as to which entities are exempted from provisions of section 13.) Section 13 sets forth a list of 19 categories of prohibited conduct by mortgage servicers, including:

  1. Misleading mortgagors directly or indirectly or defrauding any person;
  2. Engaging in unfair or deceptive practices either through action, omission, or misrepresentation;
  3. Obtaining property by fraud or misrepresentation;
  4. Knowingly or recklessly misapplying payments to the outstanding balance;
  5. Knowingly or recklessly misapplying payments to an escrow account;
  6. Placing insurance on the mortgaged property when the servicer knows or has reason to know the mortgagor has an effective policy for such insurance;
  7. Failing to timely comply with a request for payoff or reinstatement;
  8. Knowingly or recklessly misreporting to a credit bureau;
  9. Failing to report payment history to a credit bureau at least annually;
  10. Collecting PMI beyond the date that PMI is required;
  11. Failing to properly or timely release a mortgage;
  12. Failing to notify a mortgagor of force-placed insurance;
  13. Placing force-placed insurance in an amount that exceeds the replacement cost of the improvements;
  14. Failing to provide to the mortgagor a refund of force-placed insurance if the mortgagor provides reasonable proof that the force-placed policy is not required;
  15. Requiring remittance of funds in a method more costly than a bank or certified check;
  16. Refusing to communicate with a mortgagor’s authorized representative;
  17. If required to hold a mortgage servicing license, conducting any business as a mortgage servicer without a license;
  18. Negligently or wilfully making a false statement to a government agency; and
  19. Attempting to charge or collect a fee that is prohibited.


Sections 14, 15, and16, effective October 1, 2014, grant to the Commissioner the authority and power to conduct broad investigations and examinations, including the ability to view and inspect records and documents and compel the presentation of records and attendance of individuals whose testimony may be required about residential loans. The Commissioner may suspend, revoke, or refuse to renew any mortgage servicer license after investigation and a finding that the mortgage servicer: (1) made a material misstatement on the application; (2) committed any fraud, misrepresentation, or misappropriation of funds; (3) violated any provision of the banking laws; or (4) failed to perform any agreement with a mortgagee or mortgagor.

Section 17 clearly provides, from its effective date of October 1, 2014, an exemption from sections 5 through 13 of the Act for: (1) mortgage and correspondent lenders servicing their own loans; (2) any entity servicing five or fewer loans in any 12 consecutive months; and (3) any agency of the federal, state, or municipal government. There is, however, complete ambiguity as to whether an exemption is also granted to any entity exempted from licensure under Section 4(b)(1), (2), and(3) of the Act, which includes federally insured banks, out-of-state banks, state and federal credit unions, and wholly-owned subsidiaries of such banks or credit unions. Section 17 of the Act states that such entities are exempted from sections 5 to 13, inclusive, of the Act; however, Section 4(c) expressly provides that sections 10 through 13, inclusive, applies to any entity acting as a mortgage servicer in Connecticut on or after January 1, 2015, even those exempted from licensure under section 4(b).

Mediation and Reverse Mortgages
Sections 38 and 46 extend the Connecticut Court-Annexed mediation program until 2016. Under the current statute, the program was set to expire in 2014. Also, effective as of October 1, 2014, the Act, section 37, institutes a “premediation review protocol” where the judicial foreclosure mediator can re-request any documents that are incomplete or otherwise likely to be rejected by a foreclosing plaintiff, which potentially may increase the number of productive first or second mediation sessions. Section 51 creates a task force for the purpose of examining the reverse mortgage industry in Connecticut.

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Summer 2014 USFN Report

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Connecticut: New Form of Foreclosure

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Adam Bendett
Bendett & McHugh, P.C.
USFN Member (Connecticut, Maine, Vermont)

By virtue of Connecticut Public Act 14-84, An Act Concerning an Optional Method of Foreclosure (Act), Connecticut foreclosure procedure will change in a significant way. The two most practical effects of the Act are that it requires a new 60-day foreclosure notice as well as another affidavit that must be filed as a condition of “first legal.” The effective date is January 1, 2015, so this will provide additional time for mortgage servicers to prepare any necessary templates and processes. In short, the Act will create an optional method of foreclosure: a foreclosure by market sale, which is summarized below.

Required 60-Day Notice
— Effective January 1, 2015, a mortgagee (defined as the owner or servicer of the debt secured by the mortgage) who elects to foreclose on a residential first mortgage loan will be required to give a pre-foreclosure notice to a “mortgagor.” A “mortgagor” is defined as a borrower who occupies the subject residential property as a principal residence, the appraised value of which property, less any prior liens, is less than the subject mortgage debt. Such notice may be combined and delivered at the same time as any other notice, including the correct notice under the Emergency Mortgage Assistance Program (EMAP notice).

Similar to the EMAP notice, the notice must be sent by certified or registered mail to the property address. In addition, the notice must advise the mortgagor of the right to contact the mortgagee to discuss whether the property may be marketed for sale by a listing agreement under the Act by mutual consent of the mortgagor and mortgagee. The notice must also advise the mortgagor as follows:

(1) of the mailing address, telephone number, facsimile number, and electronic mail address that should be used to contact the mortgagee;
(2) of a date not less than 60 days after the date of such notice by which the mortgagor must initiate such contact, with contemporaneous confirmation in writing of the election to pursue such option sent to the designated mailing address or electronic mail address of the mortgagee;
(3) that the mortgagor should contact a real estate agent licensed under the Connecticut General Statutes to discuss the feasibility of listing the property for sale pursuant to the foreclosure by market sale process;
(4) that, if the mortgagor and mortgagee both agree to proceed with further discussions concerning an acceptable listing agreement, the mortgagor must first permit an appraisal to be obtained in accordance with the Act for purposes of verifying eligibility for foreclosure by market sale;
(5) that the appraisal will require both an interior and exterior inspection of the property;
(6) that the terms and conditions of the listing agreement, including the duration and listing price, must be acceptable to both the mortgagee and mortgagor;
(7) that the terms and conditions of any offer to purchase, including the purchase price and any contingencies, must be acceptable to both the mortgagor and mortgagee;
(8) that, if an acceptable offer is received, the mortgagor will sign an agreement to sell the property through a foreclosure by market sale; and
(9) in bold print and at least ten-point font, that, if the mortgagor consents to a foreclosure by market sale, the mortgagor will not be eligible for foreclosure mediation in any type of foreclosure action that is commenced following the giving of such consent.

Note that due to the manner in which “mortgagor” is defined in the Act, the notice only seems to be required in situations where there is no equity in the subject property above the mortgagee’s lien. However, it may be difficult to determine the equity position prior to sending the notice, and it appears an appraisal would be required as well, so it may be more practical to send the notice to all borrowers of residential first mortgages who occupy the property as their principal residence and combine it with the current EMAP notice or combined demand letter/EMAP notice.

The Affidavit Requirement — After expiration of the notice period provided in the required notice, the foreclosure may proceed only if the mortgagee files an affidavit stating that the notice provisions of the Act have been complied with and either the mortgagor failed to confirm an election to participate in the foreclosure by market sale by the deadline set forth in the notice, or that discussions were initiated but —

(1) the mortgagee and mortgagor were unable to reach a mutually acceptable agreement to proceed;
(2) based on the appraisal obtained pursuant to the Act, the property does not appear to be subject to a mortgage that is eligible for foreclosure by market sale;
(3) the mortgagor did not grant reasonable interior access for the appraisal required by the Act;
(4) the mortgagee and mortgagor were unable to reach an agreement as to a mutually acceptable listing agreement pursuant to the Act;
(5) a listing agreement was executed, but no offers to purchase were received;
(6) an offer or offers were received, but were unacceptable to either or both the mortgagee and mortgagor; or
(7) other circumstances exist that would allow the mortgagee or mortgagor to elect not to proceed with a foreclosure by market sale pursuant to the Act and other sections of the Connecticut General Statutes.

Importantly, it should be noted that the Act does state that nothing shall be interpreted as requiring the mortgagor or mortgagee to participate in further discussions.

The Appraisal Requirement, Listing Agreement, and the Contract
— If discussions are pursued regarding a foreclosure by market sale, the mortgagee shall have an appraisal performed by a licensed Connecticut appraiser, and the mortgagor shall promptly provide both interior and exterior access to the property. If the appraisal indicates the mortgage is eligible for a foreclosure by market sale (there is no equity in the property after the mortgagee’s lien), the mortgagor and mortgagee may reach an agreement concerning the listing of the property. The listing agreement will require that all offers be communicated to the mortgagor and mortgagee as soon as practicable. The mortgagee must provide a name, mailing address, telephone number, fax number, and email address to be used to report offers to the mortgagee. The mortgagee may not require a particular licensee or group of licensees as a condition of approving a listing agreement. Please note that the Act provides that nothing requires any party to reach an agreement on an acceptable listing agreement.

If a listing agreement is executed pursuant to the Act, and an offer is received that is acceptable to both the mortgagor and mortgagee, the mortgagor shall execute a contract for sale with the purchaser on those terms, which will include that the offer is contingent upon the completion of the foreclosure by market sale in accordance with the Act. If the offer is acceptable to the mortgagor but is not acceptable to the mortgagee, the mortgagee shall issue a written notice of its decision, which shall include the general reason for the decision. After execution of the contract, the mortgagor will provide the same to the mortgagee within five days along with written consent to the foreclosure by market sale. The Act specifically imposes no duty on either party to accept any offer made.

Procedure for Foreclosure by Market Sale
— Not later than 30 days after the receipt of the contract and consent, or the satisfaction of all contingencies in the contract, whichever is later, the foreclosure may be commenced. The foreclosure complaint shall contain a copy of the contract and the appraisal acquired pursuant to the Act.

Ten days following the return date, the mortgagee may move for foreclosure by market sale. Thereafter, the court, with consent of the mortgagor, may order a foreclosure by market sale. The only issues at the hearing are to be the finding of the fair market value of the property and of any priority liens, a determination of the fees and costs of the sale (including any broker’s commission), the person appointed by the court to make the sale, the costs and expenses of the purchaser of the property, and the mortgagee’s debt, as well as whether the debt and priority liens exceed the fair market value of the property.

Note that it is unclear how the court would determine the purchaser’s costs and expenses, which is a required finding. Also, it is assumed that the person appointed to sell the property would be similar to a committee of sale that is presently ordered in a foreclosure by sale in Connecticut, who is typically a local attorney. This will be an extra expense to, presumably, be deducted from the sale proceeds.

After the sale takes place, the procedure will be similar to the current foreclosure by sale process in Connecticut. The sale proceeds will be deposited in the court and the plaintiff will have to file a motion for supplemental judgment, have the motion granted by the court at a hearing calendar, and await expiration of the 20-day appeal period before the court will be able to disperse the sale proceeds, after netting out the approved costs of sale.

If the mortgagor consents to a foreclosure by market sale, the mortgagor is not eligible for foreclosure mediation. However, if the court denies the motion for a foreclosure by market sale, or circumstances develop that make it reasonably likely that a sale will not be consummated under the Act, the mortgagor may, if otherwise eligible, apply for foreclosure mediation, provided the mortgagor did not substantially contribute to the court’s denial. In determining whether foreclosure mediation will be allowed, the court shall consider whether the petition for mediation is motivated primarily by a desire to delay entry of a judgment of foreclosure and if it is highly probable the parties will be able to reach an agreement through mediation. Also, in such a situation, the mortgagee will have the right to request another form of foreclosure judgment.

If a foreclosure by market sale is granted, the court will schedule not later than 30 days from the date of judgment, right of first refusal law days for defendants that hold subsequent encumbrances in the inverse order of priority, at which time they can tender the purchase price to the person appointed to make the sale to preserve their lien and acquire the property. If a subordinate lienholder takes no action, its lien will be extinguished. If a lienholder purchases the property as aforesaid, the purchaser in the contract will be entitled to reimbursement, from the proceeds of the market sale, of the fees and costs associated with the contract that have been determined by the court.

Please note that there appears to be a technical error in the Act in this regard, as it seems to give subsequent defendant lienholders a superior right to prior lienholders who are also defendants, as it does not state the subsequent lienholder that takes title in this manner would take such title to the property subject to the rights of defendants in the action (other than the plaintiff), with prior liens, who did not have an opportunity to exercise a right of first refusal under this statutory scheme. This may cause the Act to be constitutionally suspect. Another issue with the Act is that it states that the purchaser takes title to the property free and clear of all parties to the action. It does not state that the purchaser takes the property free and clear of any liens filed after the lis pendens. Therefore, such a post lis pendens-filed lien could have the effect of disrupting the closing of transfer of title to the purchaser, like it would in a typical real estate transaction.

It should also be noted that property transferred by this method will not be subject to state conveyance taxes. Additionally, the provision of the current statute that provides a reduction in the deficiency judgment for any party filing a motion for foreclosure by sale does not apply to this type of foreclosure.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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CFPB Mortgage Servicing Rules — Loss Mitigation Procedures upon Receipt of a CLMP

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Andrew W. Saag
Sirote & Permutt, P.C.
USFN Member (Alabama)

The mortgage servicing rules that went into effect in January 2014 established new rules and restrictions with respect to loss mitigation procedures during the foreclosure process. Discussed here are the procedures by which a mortgage servicer should operate upon receipt of a complete loss mitigation package (CLMP).

What is a CLMP?
The new rules do not specifically define what constitutes a CLMP. Instead, a CLMP means that the servicer has received all information requested from the borrower that is within the borrower’s control. If documents are requested from the borrower that are not in the borrower’s control, the application should be considered complete even if these documents are omitted. While the servicer is not required to supplement the loss mitigation package sent by the borrower, the servicer should exercise reasonable diligence in obtaining documents and information to complete a loss mitigation application.

What to do with a CLMP?
If a servicer receives a CLMP 45 days or more prior to the scheduled foreclosure sale, the servicer must notify the borrower in writing within five business days after receiving the CLMP that the loss mitigation package is complete. The notice must also contain a statement that the borrower should consider contacting servicers of any other mortgage loans secured by the same property to discuss available loss mitigation options.

If the CLMP is received more than 37 days prior to the scheduled foreclosure sale, the servicer must evaluate the borrower for all loss mitigation options available to the borrower, and provide the borrower with notice in writing stating the servicer’s determination of which loss mitigation options, if any, it will offer to the borrower. This evaluation and response must be completed within 30 days of receiving a borrower’s CLMP. If a CLMP is received less than 37 days prior to the scheduled foreclosure sale, the servicer is not required to comply with the loss mitigation rules.

What to not do once a CLMP is received?
If a borrower submits a CLMP prior to the first notice or filing required by applicable law, the servicer must not commence the foreclosure process unless: (1) the servicer notifies the borrower that the borrower is not eligible for any loss mitigation option and the appeal process has been exhausted. [The appeals process can be exhausted if the appeals process is not applicable, the borrower has not timely requested an appeal, or the borrower’s appeal has been denied.]; (2) a borrower rejects all loss mitigation options; or (3) a borrower fails to comply with the terms of a loss mitigation option. If the borrower submits a CLMP after the first notice or the first filing required by law but more than 37 days prior to the scheduled foreclosure sale, a servicer may not move for foreclosure judgment or order of sale, or conduct a foreclosure sale unless one of the above-referenced exceptions is satisfied.

Where foreclosure procedure requires a court action or proceeding, a document is considered the first notice or filing if it is the earliest document required to be filed with a court or other judicial body to commence the action or proceeding. Where foreclosure procedure does not require an action or court proceeding (such as under a power of sale), a document is considered the first notice or filing if it is the earliest document required to be recorded or published to initiate the foreclosure process. The comments to the rule indicate that nothing in the rules prohibit a servicer from proceeding with the foreclosure process, including any publication, arbitration, or mediation requirements when the first notice or filing for a foreclosure proceeding occurred before a servicer receives a CLMP so long as any such steps do not cause or directly result in the issuance of a foreclosure judgment or order of sale, or the conducting of a foreclosure sale.

The comments to the rule also state “[t]he prohibition on a servicer moving for judgment or order of sale includes making dispositive motion for foreclosure judgment, such as a motion for default, judgment on the pleadings, or summary judgment, which may directly result in a judgment of foreclosure or order of sale. A servicer that has made any such motion before receiving a CLMP has not moved for a foreclosure judgment or order of sale if the servicer takes reasonable steps to avoid a ruling on such motion or issuance of such order prior to completing the procedures required by Section 1024.41, notwithstanding whether any such action successfully avoids a ruling on a dispositive motion or issuance of an order of sale.”

What if borrower is offered a loss mitigation option?
The rules set forth specific timing requirements with respect to how long borrowers have to accept loss mitigation options. If a CLMP is received 90 days or more prior to the scheduled foreclosure sale, a servicer must allow the borrower at least 14 days to accept or reject the offer. If a CLMP is received less than 90 days but more than 37 days prior to the scheduled foreclosure sale, a servicer must allow the borrower at least seven days to accept or reject the offer. Except as discussed in the paragraph below, if the borrower doesn’t respond within the deadline, the servicer may deem the borrower’s non-responsiveness as a rejection of the offer.

If the borrower does not timely respond to a loss mitigation offer or fails to satisfy the servicer’s requirements for accepting a modification offer, but submits payments required by the modification offer within the deadline, the servicer must give the borrower a reasonable period of time to fulfill any remaining requirements. In addition, if an appeal is available and the borrower timely appeals the decision, the servicer must extend the deadline for accepting a loss mitigation option until 14 days after the servicer provides notice regarding how the appeal was resolved.

What if borrower is denied loss mitigation options?
The servicer must send a notice to the borrower outlining the reasons why each loss mitigation option was denied. For instance, if the servicer reviews a borrower for three loss mitigation options and two of those options are denied, the notice must contain specific reasons as to why the borrower was denied the two options. If the borrower has a right to appeal the decision, the notice must also state that the borrower may appeal the servicer’s determination for any denial, the deadline for the borrower to make an appeal, and any requirements for making an appeal. If a denial is based on a net present value calculation, the notice must include specific inputs used in the net present value calculation. Note also that, in most cases, if a denial is based upon a requirement of an owner or assignee of the loan, the notice must identify the owner or assignee of the loan and the requirement upon which the denial is based.

Borrower’s Appeal Rights
If a CLMP is received 90 days or more prior to the scheduled foreclosure sale or before a foreclosure sale is scheduled, a borrower is permitted to make an appeal within 14 days after the servicer provides notification of any loss mitigation decisions. The appeal must be reviewed by different personnel than those who reviewed the borrower’s initial CLMP. Supervisors who are responsible for oversight of the personnel that conduct the initial review are permitted to review an appeal so long as they were not directly involved with the initial evaluation of the borrower’s CLMP.

The servicer must notify the borrower, stating the servicer’s determination of whether the servicer will offer the borrower a loss mitigation option based upon the appeal, within 30 days of the borrower making the appeal. The servicer may require the borrower to accept or reject an offer after an appeal no earlier than 14 days after the servicer provides notice to the borrower. A servicer’s determination of an appeal is not subject to any further appeal.

What about a loan service transfer?
The new servicer must obtain documents and information related to the CLMP from the prior servicer and must continue the loss mitigation process to the extent possible. For purposes of compliance with loss mitigation timing requirements, the new servicer must consider the CLMP to have been submitted by the date when the prior servicer received the CLMP. The borrower must not lose the protection of the timing requirements due to a service transfer of a loan.

Private Right of Action
Borrowers have a private right of action to enforce compliance with the loss mitigation procedures. Borrowers may seek any actual damages as well as any additional damages in a case of a pattern or practice of noncompliance in an amount not to exceed $2,000. Damages awarded in class actions may not exceed the lesser of $1,000,000 or 1 percent of the net worth of the servicer. Borrowers may recover reasonable attorneys’ fees.

© Copyright 2014 USFN. All rights reserved.
Summer 2014 USFN Report

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BANKRUPTCY UPDATE Official Ch. 13 Form Plan and Rule Changes Delayed Until December 2016

Posted By USFN, Monday, August 11, 2014
Updated: Tuesday, October 13, 2015

August 11, 2014

 

by Michael J. McCormick
McCalla Raymer, LLC
USFN Member (Georgia)

The Advisory Committee on Bankruptcy Rules of Procedure (Advisory Committee) met April 22-23 at the University of Texas, School of Law, in Austin, Texas. This was the first meeting of the Advisory Committee since more than 150 comments were submitted about the Official Chapter 13 Form Plan (and accompanying Rule changes) during the public comment period, which ended February 15, 2014. Several observers were in attendance at the meeting, including servicers, Chapter 13 trustees, and USFN Bankruptcy Committee members Dan West (South & Associates, P.C.) and this author.

It was anticipated that what would come out of this meeting would more than likely be the final version of the official form plan scheduled to go into effect on December 1, 2015. Instead, the Advisory Committee took note of the amount of opposition to the official form plan from the comments submitted. In addition, the Advisory Committee noted the importance of having the rule changes and the official form plan go into effect at the same time. Accordingly, both will be re-published for comment in August 2014, but the earliest possible effective date is now December 1, 2016. Thus the changes (both the rules and official form plan) will be delayed at least a year.

Nevertheless, the proposed changes to the Model Proof of Claim Attachment are still scheduled to go into effect in December 2015.

It was clear from the meeting in Austin that at least a few of the Advisory Committee members were unimpressed by the number of comments submitted, even though 150 is more than usual. The feeling was that with 360 judges, thousands of trustees and lawyers, if only 150 people took the time to write in, that must mean that not too many people have an issue with the proposed changes. This is incorrect and ignores the fact that many “collective” comments were submitted by various organizations and groups of judges or trustees.

Under the proposed rule changes, the most significant change coming for servicers is the reduction in the bar date for filing a proof of claim from approximately 120 days to 60 days. This change received less than two minutes of discussion at the meeting. Although servicers have been granted a reprieve to get ready for this change, it’s very important that the servicers and law firms submit comments, individually, when the plan and rules are published again for public comment.

Editor’s Note: The Proof of Claim Form 410 and Mortgage Proof of Claim Attachment (Form 410A) — as drafted on January 17, 2014, and currently scheduled to go into effect in December 2015 — can be found here.

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Summer 2014 USFN Report

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